The gross profit of any business is determined based on the Trading Account, whereas net profit is ascertained using the Profit and Loss Account. An overview of the differences between gross profit and net profit is presented below.

Gross Profit

Net Profit

Ascertained through the Trading Account Ascertained through the Profit and Loss Account
Gross result of business activities Net result of business activities
Defined as the excess of net sales over net cost of purchase or manufacture (including all expenses relating to purchasing or manufacturing) Defined as the excess of gross profit over all expenses relating to sales and the administration of the business
Does not reflect the true profit of a business Reflects the true profit of a business
Transferred to the Profit and Loss Account Transferred to the Capital Account in the case of a sole proprietorship and to the Profit and Loss Appropriation Account in the case of a partnership or joint-stock company
Indicates a credit balance in the Trading Account Indicates a credit balance in the Profit and Loss Account
The progress of a business can be measured using the percentage of gross profit on sales The earning capacity of a business can be measured using the percentage of net profit on capital employed
Business owners have no claim over gross profit Business owners have a full claim over net profit

Frequently Asked Questions

What is the difference between a gross profit and a net profit?

The gross profit of any business is determined based on the Trading Account, whereas net profit is ascertained using the profit and loss account.

What does it mean by gross result of business activities?

It refers to the excess of net sales over net cost of purchase or manufacture (including all expenses relating to purchasing or manufacturing).

What does it mean when you say gross profit doesn't reflect the true profit of business?

When business owners look at gross profit, they don't get the full picture. The net result of business activities is said to be more inclusive in comparison with the total sales income statement which grosses up all the elements that go into making up these incomes.

What does it mean when you say net profit reflects the true profit of business?

Net profit shows what percentage of money is left over after all the expenses are paid to owners who provide their own capital for starting or expanding a business. It can be interpreted as how much money is available for distribution after all the bills have been paid.

What is transferred to the profit and loss account?

Gross profit is transferred to the profit and loss account.

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